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Starve the Beast

Economics professor Greg Mankiw shares some interesting thoughts, citing Paul Krugman, on why Bush’s tax cuts may result in smaller government in the next administration than we would get otherwise. This is likely true, no matter which candidate wins. Krugman, however, calls this a “poison pill,” a way of sabotaging a takeover or transfer of control, lamenting that, “looking at the tax proposals of the two presidential candidates, it’s remarkable and disheartening to see how effective President Bush’s fiscal poison pill has been in restricting the terms of debate.”

As Mankiw points out, though, the situation is not “entirely negative.” Indeed, for those of us who are classical liberals or – gasp – conservatives, a restricted debate in terms of how and how much the federal government can spend is not necessarily a bad thing. Tax increases of the type Obama plans will not cure deficit spending. This is true both because of something called a Laffer curve (higher tax rates do not always equal proportionally higher tax revenues, since capital often goes elsewhere or stops working) and because governments are greedy beasts – the more food you give them to cure their shortages, the bigger they get. This is why despite tripling tax revenues between 1932 and 1940, that period saw not a reduced deficit, but a 33% deficit growth.